Monday, December 11, 2017

The wage - debt deflation dynamic and the next recession

 - by New Deal democrat

One of the important dynamics why recessions end is that inflation decelerates more than wage growth. Thus, for the 90% or so of people who still have jobs, there are some compelling bargains, enough to jumpstart more spending.

That all gets short-circuited if wages actually decline. Then, the fact that debt payments, unlike prices, do not decline, overwhelms the possibility of spending growth. That was one of the most ruinous aspects of the 1929-33 great contraction.

This is why I keep harping every month on the poor wage growth shown in the jobs reports.  Here we are, over eight years into the economic expansion, and wage growth is actually declining a little, now at just 2.3% YoY:

This is the smallest wage growth of any expansion since the reports began over half a century ago. Simply put, we are more at risk of another wage deflationary "event" during the next recession, whenever it hits, than at any time since the 1930s.

Let me try to show this in detail.

As already noted, during recessions wage growth declines. What I've done below is to show that for each recession for the last half century, with one alteration: I've recalculated the starting number for peak wage growth during the previous expansion to 2.3%, to match its current rate:

Starting from +2.3%, 4 of the last 7 recession produce a period of wage deflation. The three worst recessions: 1974, 1981, and 2008, produce wage deflations of about a year or more.

But that is just on a YoY basis. When we take a look on a month over month basis, episodes of wage deflation continue off and on all through our current expansion:

And even following shallower recessions like 1991 and 2001, brief episodes of wage deflation occur for several years:

Of course, these charts are strictly hypothetical. The point is that, if actual wage deflation were to occur, because debt payments do not deflate, the dynamic can take on a life of its own, creating a vicious downward spiral, as it did in 1929-32.

Imagine such a deflationary event were to begin to occur in, say, late 2019. Imagine that the makeup of Congress then is similar to what it is now. Now imagine how such a Congress would approach such a deft deflation dynamic.

That is the stuff nightmares are made of.

Monday Morning Bond Market Round-Up

The Corporate Curve is Also Compressing

The top chart shows the 1-3 year corporate market, which is now near it's highest level for the year.  The 3-5 year sector (second from the top) is also rising but is below its yearly high.  The 15+ year sector of the market (second from the bottom) is declining.  As a result, the corporate yield curve is also compressing (bottom chart).

Treasury Market ETFs Show the Treasury Curve Compression

Charts of the treasury market ETFs show why the yield curve is compressing.  The short end of the market is selling off (top chart) the belly of the curve is flat (middle chart) and the long-end of the curve is rallying (bottom chart).  As a result:

The yield curve flattens.

Job Growth is Strong Enough to Support Another Hike

The 3, 6, and 12-month averages of payroll job growth area all above 170,000/month, which is strong enough to support another hike from the Fed.

Keep An Eye On Oil

The weekly oil sector chart is right at the 200-week EMA with a rising MACD.  So far this expansion, we've been very lucky when it comes to oil prices.  However, should they continue rising, we may have a problem.  

Saturday, December 9, 2017

Weekly Indicators for December 4 - 8 at

- by New Deal democrat
My Weekly Indicators post is up at

The big trend is in the near term forecast, while the general underground movement is in the long term indicators.

Friday, December 8, 2017

November Jobs Report: good month, same caveats

- by New Deal democrat

  • +228,000 jobs added
  • U3 unemployment rate unchanged at 4.1%
  • U6 underemployment rate rose +0.1% from 7.9% to 8.0%
Here are the headlines on wages and the chronic heightened underemployment:

Wages and participation rates
  • Not in Labor Force, but Want a Job Now:  rose +53,000 from 5.175 million to 5.238 million   
  • Part time for economic reasons: rose +48,000 from 4.753 million to 4.801 million
  • Employment/population ratio ages 25-54: rose +0.2% from 78.8% to 79.0%
  • Average Weekly Earnings for Production and Nonsupervisory Personnel: rose +$.0.5 from a downwardly revised $22.19 to $22.24, up +2.4% YoY.  (Note: you may be reading different information about wages elsewhere. They are citing average wages for all private workers. I use wages for nonsupervisory personnel, to come closer to the situation for ordinary workers.)    
Holding Trump accountable on manufacturing and mining jobs

 Trump specifically campaigned on bringing back manufacturing and mining jobs.  Is he keeping this promise?  
  • Manufacturing jobs rose by +31,000 for an average of  +15,000 a month vs. the last seven years of Obama's presidency in which an average of 10,300 manufacturing jobs were added each month.   
  • Coal mining jobs fell -400 for an average of -15 a month vs. the last seven years of Obama's presidency in which an average of -300 jobs were lost each month
September was revised upward by +20,000. October was revised downward by -17,000, for a net change of +3,000.   

The more leading numbers in the report tell us about where the economy is likely to be a few months from now. These were mixed.
  • the average manufacturing workweek was unchanged at 40.9 hours.  This is one of the 10 components of the LEI.
  • construction jobs increased by +24,000. YoY construction jobs are up +184,000.  
  • temporary jobs increased by +16,300. 
  • the number of people unemployed for 5 weeks or less increased by +121,000 from 2,129,000 to 2,250,000.  The post-recession low was set al,ost two years ago at 2,095,000.
Other important coincident indicators help  us paint a more complete picture of the present:
  • Overtime was unchanged at 3.5 hours.
  • Professional and business employment (generally higher- paying jobs) increased by  +46,000 and  is up +548,000 YoY.

  • the index of aggregate hours worked in the economy rose by 0.1%  from 115.4 to  115.5.
  •  the index of aggregate payrolls rose by  0.4%  from 171.1 to 171.7.     
Other news included:           
  • the  alternate jobs number contained  in the more volatile household survey increased by  +183,000  jobs.  This represents an increase of- 1,187,000  jobs YoY vs. 2,071,000 in the establishment survey.      
  • Government jobs rose by 7,000.       
  • the overall  employment to  population ratio for all ages 16 and up fell -0.1% from 60.2% to  60.1 m/m  and is up + 0.3% YoY.         
  • The  labor force participation  rate was unchanged m/m and is also unchanged YoY at 62.7%   

This was a good report on most metrics. Under the headlines, it was slightly weaker than apparent. While the prime age participation rate rose to a new expansion high, measures of underemployment weakened slightly.  

Meanwhile, the revisions were of particular interest. September was initially reported as a loss, the first in 7 years, but is now +38,000. Also, there is a question as to whether we should still take into account the hurricanes, since in the past it has been reported that the aftereffects last more than 2 months.  In this regard, the three month average of +170,000 is in line with the pre-hurricane average.

As usual, wage gains for nonsupervisory workers continue to stink.

So: a good report, doing nothing to alter my opinion that we are late in the expansion, and that the next recession is at grave risk of including actual wage deflation.

From Bonddad

A few points:

The 3, 6, and 12-month moving average of establishment job growth are all about 170.  However, notice that all three area moving sideways for the most of this year.  This tells us the economy will probably continue to print at this level (on average, of course) for the next few months

The 3, 6, and 12-month moving average of goods-producing jobs are all moving higher.  This is good news, but there's a caveat; notice the left-hand scale, which is in the 10,000s.  So 40 is 40,000  Put another way, there just aren't that many jobs in the goods-producing sector of the economy.

The service-producing sector is also growing, but the overall pace is clearly declining, which we also see in the Y/Y percentage change:

Let's turn to a few household report numbers:

The employment/population ratio is still moving higher

But the LFPR is still moving sideways.

Thursday, December 7, 2017

A look at the short leading indicators - December 2017

 - by New Deal democrat

What will the economy look like over the next 3 to 6 months?  I take an updated look over at

Mid-Week Bond Market Round-Up

Declining Inflation Expectations 

The University of Michigan's long-run inflation expectations (top chart) and the 10-year CMT-10 year TIPS rate (bottom) chart are both declining.  The University of Michigan's estimate has always been a bit high; it was 3-3.5% in 2012-2014 and has moved lower to 2.5%.  The bond market measure is lower but probably more accurate.  Either way, both have moved lower by about 50-65 basis points in the last 3-4 years, which has important ramifications for Fed policymakers. 

Yield Curve Flattening

Since the beginning of the year, the curve has definitely flattened, with most of the movement coming in the short-end of the curve.

Your New Richmond Fed Presidebt

And Explanation of the New Bond Market Conondrum

Declining inflation expectations
Declining r*
Decreased expectations for a fiscal stimulus and increased perception of economic and political risk.
Decreased term premium